Why You Don’t Need 20% Down to Buy Your Next Home

August 18, 2016

You don't need 20% down

You may have heard or read that it’s best—or even required—to put a 20 percent down payment on your home. A down payment is simply the amount of cash you are putting towards the purchase of your home. For a $200,000 home, 20 percent down would be $40,000. No small amount.

The 20 percent myth grows

The myth of the 20 percent down requirement came of age after the housing crisis. Access to credit tightened, especially for median-income homebuyers, including responsible buyers who had the income to buy, but not the large down payment. Thankfully, the landscape has improved.

Low down payment options have been around for a long time. In fact, data shows that low down payment loans with sound underwriting (loan is fully documented, income verified) are just as successful as loan with large down payments.

However, putting down 20 percent isn’t necessarily bad thing. It may be the right choice for you if you have the savings as well as investments in other assets. It gives you 20 percent equity in your home and helps you avoid paying a monthly fee for private mortgage insurance. This insurance is required on home loans with less than 80 percent equity and protects the lender if you fall behind on your home loan.

Sidelined buyers watch housing costs rise

At the same time, saving for 20 percent is keeping many buyers on the sidelines. Plus, with rents rising quickly, housing costs go up, making it harder and harder to save for that down payment.

And, when you put down a low down payment, you can leverage and diversify your other investments so all your money isn’t in one asset—your home.

What are your options?

Wait and save. Just keep in mind that a RealtyTrac study found that on average it would take a homebuyer 12.5 years to save for a 20 percent down payment. That’s more than 12 years for your rent and home prices to rise, too.

Find a homeownership program.

The majority of homeownership programs provide down payment and closing cost assistance, helping finance some or all of your costs. There are nearly 2,500 homeownership programs available across the country, including grants, forgivable loans, below-market first mortgages, tax credits and more.

The average down payment program benefit across all programs is more than $8,000. Both the home and the homebuyer must qualify for the program so do your research early. Use our program finder to narrow down your options.

Use a low down payment mortgage. There are several options for buyers today. Keep in mind that you can layer down payment programs with these loans.

  • FHA loan: Popular with first-time homebuyers, it allows a 3.5% down payment minimum.
  • VA loan: If you are a veteran or member of the U.S. military, look into a VA loan which offers 0% down.
  • USDA loan: Eligible in rural and suburban areas, it offers 0% down.
  • Home Possible mortgage: Freddie Mac’s low down payment loan allows down payments of 3 to 5% and flexible sources of funds for down payments.
  • HomeReady mortgage: Fannie Mae’s new loan program that allows a 3% minimum down payment. It’s great for multigenerational household because it allows the income of everyone in the home to be used to qualify for the home loan.
  • Conventional loan with private mortgage insurance: Allows 3% down payment minimum. PMI will be required if you put down less than 20%.

No one size fits all.

For home loans, there’s no one size fits all or right choice for everyone. Like you, your finances and home buying goals are unique. That’s why it’s important to lock up your home financing before you tour that dream home.

Begin by investigating your options early: talk to multiple lenders, search for homeownership programs and talk to your Realtor.

Do you have a low down payment story to share? We’d love to hear about your experience.

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